Revisiting the long-run and short-run relationship between economic growth, exchange rate, money supply, and government expenditure: empirical evidence from India using the NARDL approach.
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The prior research that examined at how exchange rate fluctuations affected economic growth were based on the symmetric method, which predicted that the impact on GDP would be the same for both overvalued and undervalued exchange rates. However, recent research has shown that important economic variables like trade flows and economic growth are typically affected asymmetrically by the exchange rate. The primary aim of the present study is to examine the long term and short-term association among economic growth, exchange rate changes, money supply and government expenditure for a period of 1980-2022 in India. The study employed nonlinear autoregressive distributed lag model (NARDL) to examine the asymmetric relationship among the scrutinised variables. Furthermore, we used Granger causality test to check the direction of causal association. The results of NARDL confirm the long-term relationship among economic growth, exchange rate changes, money supply and government expenditure. The findings show that undervaluation affect economic growth negatively in the case of the Indian economy whereas overvaluation promotes it. Moreover, we found asymmetric impact of exchange rate change on economic growth in India. The Wald test confirms the asymmetrical relationship between exchange rate and economic growth for both short-run and long-run. The results of causality test show bidirectional causality among exchange rate, government expenditure and economic growth. While, one-way causal effects run from money supply to economic growth. The findings of the study have some policy implications. Exchange rate governing organisation should place a priority on restoring stability and work towards developing more robust exchange rates in order to achieve the goal of sustained economic growth and, ultimately, sustainable development JEL: B22, CO1, E51, H50